VideoChemical companies do it. Engine makers do it. Even beer brewers and semiconductor manufacturers do it. They all form joint ventures or alliances with competitors. Who would have predicted that tough competition would foster so much cooperation among rivals? Although no one keeps tabs on joint ventures and alliances between companies that compete against one another, it appears that the practice, which used to seem almost unthinkable, is becoming commonplace.
That may come as a surprise to many finance executives who would find it anathema to shack up with a competitor. When news reached Bruce Hughes in early 1996 that his employer, GE Aircraft Engines, in Cincinnati, was talking with arch-competitor Pratt & Whitney, in East Hartford, Connecticut, about jointly designing jet engines for Boeing, he was stunned. "It was disbelief," says Hughes, who subsequently became the venture's co-general manager (along with a counterpart from Pratt & Whitney) and in December was named its president.
But in the year since it was launched, the alliance has survived the suspension of the Boeing program that spawned it in the first place, and has initiated discussions about the new engine with Airbus Industries, the European consortium that builds passenger aircraft.
Truces between General Electric and Pratt & Whitney, Eastman Kodak and Sun Chemical, and Lyondell Petrochemical and Millennium Chemicals only exemplify the growing number of cases in which tough adversaries are exchanging swords for plowshares. The roster also includes linkups in recent years of Hewlett-Packard and Canon, Texas Instruments and Hitachi, and Canadian brewers Molson and Moosehead. Some of these arrangements are joint ventures in the sense of separate entities with their own financial structures; others are alliances, either formal or informal. Both categories, say experts, are proliferating.
"It's a very important phenomenon that is growing by leaps and bounds," says Washington, D.C., consultant Jordan Lewis, who helped arrange an alliance between rivals Bell Atlantic and AT&T to develop products and systems for the Bell network, and another between Merck and Pasteur-Mérieux to develop, produce, and market vaccines. "It is important not only to companies that have done it, but also to companies that are not doing it," Lewis says, "because it's going to hurt [the latter] badly."
Despite fears that rivals might gain access to customers, markets, technologies, or patent secrets, powerful economic incentives trump long-standing rivalries. The incentives are not brand new, just heightened in degree amid intensifying global competition and the rising cost of doing almost any kind of business. "Competition is so tough that most companies realize there is no way they can be excellent at everything they have to do to compete," says Lewis.
Early last year, Texas Instruments Inc. and Hitachi Ltd. increased their stakes in TwinStar Semiconductor Inc., a joint venture that grew out of longtime cooperation in the development of DRAM (dynamic random access memory) technology, a market sector in which the two companies compete. At the outset of the venture, in 1995, Texas Instruments and Hitachi had split a 52 percent interest in TwinStar and placed the rest of the equity with a consortium of banks that also supplied the venture's credit facility. With the fresh investment, Texas Instruments and Hitachi increased their share of the equity to 76 percent.
Formalizing cooperation supplied two key advantages, explains Christopher Bettis, TwinStar's chief financial officer. It provided a manufacturing forum to assemble the best design and engineering ideas of both companies. The financial structure, new to both, says Bettis, enabled them to put resources together in a critical but costly effort that has sustained development despite a punishing downturn in demand. "The technology and the engineering resources that you need to be successful in an industry like this are so critical and in such short supply that any time you can tap into a pool of resources, it's the right thing to do," he says. "The downsides, including having to protect information, are pretty minimal. In an industry that's as competitive and fast-moving as this, the positives far outweigh the negatives."
Deals of this sort highlight awareness in corporate suites that Pyrrhic victories advance no causes. "The profit motive can make for strange bedfellows," says law professor John C. Coffee Jr., of Columbia University Law School, who specializes in corporate governance--always a lively topic when partners are competitors. Coffee attributes the surge in part to recent relaxation of legal and regulatory restrictions on cross-border joint ventures between U.S. companies and foreign rivals.
The expected costs of developing a new jet engine for a limited market--about $1 billion--is what drove GE Aircraft Engines to join forces with Pratt & Whitney. "A joint venture seems to be the only way out," says a GE spokesman, "even if it's with one of our most aggressive competitors."
The alliance, as opposed to a more formal joint venture with a financial structure of its own, is based in Hartford. Its small operation consists chiefly of about 25 design-team members, who remain on the payrolls of their respective employers. Once an engine is designed, construction will be farmed out to both parent companies. Revenues from sales of the finished products will flow to the alliance, with GE and Pratt splitting what's left after costs.
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